2013 (7) TMI 192 - AT - Income Tax

Tribunal ruling on Income Tax Act sections 14A, 115JB, and 234D

The Tribunal partly allowed the appeal of the assessee, confirming the disallowance of interest under section 14A of the Income Tax Act and the adjustment ... Adjustment to Book profit - Minimum Alternate Tax (MAT) - Amount set aside out of the profits as Debenture Redemption Reserve (DRR) - whether be considered as a 'reserve' or as a 'provision' for meeting a liability therefore deductible in the computation of 'book profit' u/s.115JB - Held that:- The set aside of profits, though for meeting a liability, is of one on capital account, so that neither the assumption thereof (the liability) nor its liquidation (discharge) would impact the operating statement of the enterprises, i.e., the company's P & L A/c., prepared/to be prepared under Parts II and III of Schedule VI to the companies act. The adjustments to the book profit u/s. 115JB are, again, also consistent with the preparation of the P&L A/c under the companies act. The set side of the profits is not to meet a trading liability or a liability on revenue account, so as to form part of or get incorporated therein, i.e., the P&L a/c. In fact, no set aside for meeting a trading liability would be required in actual practice, as such a liability would itself be charged to the operating statement, reducing the profit to that extent. Therefore, the Revenue is not incorrect in stating that the said set aside of the profits is only an appropriation of profits, and would not amount to a provision, so as to qualify for deduction in the computation of the profit of the assessee company. The issue, in fact, is not if it is a 'provision' or a 'reserve' per se, but whether it could be considered as deductible in computing the profit of the enterprise. On the contrary, the said accounting treatment, i.e., the set aside of profit, ensures capitalization of the profits, so that the debenture funds forming part of the capital structure, the same (capital) is no depleted on the redemption of the liability representing the said source of funds - the decision by the hon'ble jurisdictional high court in the case of CIT v. Raymond Ltd. (2012 (4) TMI 127 - BOMBAY HIGH COURT) is binding on this case & allow the assessee's appeal on its grounds, so that the adjustment made by it in the computation of book profit u/s. 115JB gets validated. The assessee succeeds on its relevant grounds. - Decided in favor of assessee Adjustment under clause (f) of Explanation 1 to s. 115JB in computing the book profit being the amount disallowed u/s. 14A - Held that:- The disallowance u/s. 14A is also with reference to the amount actually incurred and claimed by the assessee per its return of income, which in turn is based on the audited accounts. In any case, there can be no presumption of the expenditure qua which disallowance u./s. 14A has been made and sustained as being not debited in the account books, and which sums up the Revenue's case as made out by the ld. DR. The only option, therefore, under the circumstances available is that the matter is restored back to the file of the AO to allow the assessee an opportunity to show as to how the estimated expenditure of Rs. 8.59 lacs disallowed u/s. 14A as incurred in relation to the tax exempt income, is at either nil or a lesser amount, i.e., per the assessee's books. Issues:1. Disallowance of interest under section 14A of the Income Tax Act.2. Treatment of Debenture Redemption Reserve (DRR) in computation of 'book profit' under section 115JB.3. Levy of interest under section 234D of the Act.4. Adjustment under clause (f) of Explanation 1 to section 115JB in computing book profit.Issue 1: Disallowance of Interest under Section 14A:The appeal raised concerns about the disallowance of interest under section 14A of the Income Tax Act. The interest amount was confirmed by the Commissioner of Income Tax (Appeals) and was dismissed as not pressed during the hearing. The Tribunal decided accordingly.Issue 2: Treatment of Debenture Redemption Reserve in Book Profit Computation:The key issue was whether the amount set aside as Debenture Redemption Reserve (DRR) should be considered a 'reserve' or a 'provision' in the computation of 'book profit' under section 115JB. The Tribunal analyzed the nature of debenture funds as part of the capital structure and the accounting treatment of interest on debentures. It referred to relevant provisions of the Companies Act and previous judicial decisions. Ultimately, the Tribunal, following a decision by the jurisdictional High Court, allowed the appeal on this ground, validating the adjustment made by the assessee in the computation of book profit.Issue 3: Levy of Interest under Section 234D:The fourth ground of appeal related to the levy of interest under section 234D of the Act. The Tribunal clarified that the assessee did not deny the liability to pay interest but sought modification due to a revision in tax demand post the appellate order. Citing relevant Supreme Court decisions, the Tribunal explained that interest under sections 234A/234B/234C is mandatory. As the assessee only sought consequential relief, the Tribunal decided accordingly.Issue 4: Adjustment under Clause (f) of Explanation 1 to Section 115JB:The additional ground raised by the assessee challenged the adjustment under clause (f) of Explanation 1 to section 115JB in computing book profit. The Tribunal examined the rationale of the provision and the adjustments required in respect of sums credited or debited in the company's accounts. After considering the arguments and material on record, the Tribunal decided to restore the matter to the Assessing Officer for further examination, as conceded by the assessee's representative. The Tribunal confirmed the adjustment, dismissing the assessee's additional ground.In conclusion, the Tribunal partly allowed the appeal of the assessee, addressing the various issues raised in the appeal and providing detailed analysis and decisions on each point.